Islamic Finance

On June 3rd, at 5th Annual World Islamic Banking Conference Asia Summit taking place in Singapore, challenges as well as bright prospects of Islamic Finance were discussed by renowned personalities in the field. Likewise, our debate is proving to highlight those challenges and potential prospects of Islamic Finance.

Mr. Muath Mubarak, by highlighting the effects of global economic crisis 2008, believes that implementing Islamic Finance as a state’s economic system is the only way one country can avoid such foreseeable challenges. He stresses that Islamic Finance is not at all a new concept, rather it’s a very significant element in today’s financial world, one of the reason being why the non-Muslim countries are introducing it day by day. Moreover, he explains that the mismatch between government expenditure and tax/non-tax income is one of the main challenges to the current financial system which, he thinks, results in either too high public expenditure or too low revenue. Mr. Mubarak believes that Islamic Finance is the best solution to this mismatch as it “…is not mere a money making system rather it has been built with the ethics and morals as an integral part of the economic transaction and arrangements”.

On the other hand, going against the motion, Prof. Habib Ahmed believes that Islamic Finance is not yet ready to be implemented as a state’s economic system. To back up his view, Prof. Ahmed sheds light on two levels which contemporary Islamic Finance faces difficulty at, first being foundational and the other legal. Highlighting the challenges on foundational level, he says that “other than fulfilling the legal requirements, an Islamic financial system should also cater to the developmental and social needs of a society.” Moving on towards the legal perspective, he talks about the most raised predicament of Islamic Finance, that is, the Shari’ah requirements being diluted. Moreover, Prof. Ahmed raises concerns on the direction which industry has taken. He believes, “an Islamic financial system should have diverse organizations serving various financial needs of all in the society.” Ending the statement, Prof. Ahmed alarms about the trust that is on stake for Islamic Financial system in the future.

As it stands, the voting statistics remain pretty close, with only 54% of those who have voted side with Mr. Mubarak’s views. However, our commentators have weighed in heavily on both sides of the argument.

Highlighting the challenges related to insurance aspect of Islamic Finance, M. Umar asks, “If Islamic finance does gets to drive a state’s economic system, can it be a substitute to the current insurance model that is being used by the conventional financial systems? All trade between countries require insurance in place, how will Islamic finance provide a solution to keep running the existing trade with conventional economies?”

Mr. Ismail also shares his concern over existing financial commitments when he enquires that “…if let’s say Islamic Finance does get implemented as a state’s economic system, what will happen to the existing financial commitments? For example, if one state has a trade deal of more than 20 years with another state, and during this time span if that country decides to opt for Islamic economic system, what will happen to the existing terms of the deal, including interest?”

Others disagree, “…every new and aspiring system, not just within the financial world but rather in every aspect of global economy, faces challenges and difficulties. Therefore, is it really necessary for Islamic finance to get fully matured first and be provided as a substitute to all other conventional financial services? Why cannot it be implemented whilst these challenges persist? Can it try to evolve itself and overcome these challenges after being applied on a larger scale? How can one know that there won’t be any more challenges to ‘fully matured’ Islamic finance after being implemented as a state’s economic system?” says Idrees Fakhri.

Zara also supports this opinion by saying “There are countries that have been practicing Islamic finance. The maturity of this system can be seen by such examples. Had this system been not mature enough or not successful or been risky to considerable levels then by no means and those states and even its public would have allowed and accepted it.” This view is also shared by Mr. Wajid Ali in his thoughtful input.

As the debate enters into rebuttal stage, we look forward to another phase of lively and insightful discussion. Let’s see what our debaters have to say further about their counterpart’s arguments as well as audience’s comments in their rebuttal remarks.

Firstly, let’s understand that the modern Islamic Finance practices existed in the world for the last three decades only, even though the origins of Islamic Finance principles and transactions can be traced from the Islamic era over 1400 years ago. Conventional financial system has been imposed to the world for the last three centuries merely for the political & money power. The existing traditional financial system (capitalist, socialist and mixed economies) has brought many calamities to the world. By knowing this economic system is an evil one, many have commented and strongly opposed when it was introduced itself. I would like to recall the statement of the third president of United States of America, Thomas Jefferson when he said “Banking establishments are more dangerous than standing armies” (Letter to Elbridge Gerry, Jan. 26, 1779).

Few more wise quotes about the current financial system:

“.... if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit” Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920's, speaking at the University of Texas in 1927.

“All that we have borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign creditors’ interest rates. If you ask me what the worst thing in the world is, I will say it is compound interest” Obasanjo, Former President of Nigeria (Soon after the G8 Summit in Okinawa, 2002)

“Stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor” Professor Margrit Kennedy (Occupy Money – 2012 Edition)

According to Wikipedia & Pew Research Center, Christianity & Islam are accounted for 54% of the total population. The original scriptures of both the religions are prohibiting the interest in a very strong order:

“Do not charge your brother interest, whether on money or food or anything else that may earn interest” (Deuteronomy 23:19)

“Allah has allowed trade and prohibited Riba” (Al Quran 2:275)

If we are to follow our religions in a disciplined manner and taking the preaching to our financial matters, we cannot deal with interest in the world as per more than half of the population’s religious scriptures. This demands to nullify the current financial system in the world and requires to implement an interest free financial system. Islamic finance is not entertaining the interest/usury and also all the other prohibited activities and items as per Islamic principles. Islamic finance principles are universal and applied under all circumstances. According to the Financial Management magazine (Issue February 2014), USD 246 Billion was the total payout agreed by the US’s five largest tobacco companies in 1998 to end a case brought against them by the attorney-general of 46 states under the so-called master settlement agreement. Browns & Williomson, Ligett, Liggett & Myres, Lorillard, Philip Morris and RJ Reynolds were obliged to pay USD 246 Billion over the course of 25 years ending in 2025. Any negative influence products, items or business activities which will bring negative/bad impact to the society have been prohibited completely in Islamic finance.

Even though the two slaughtered chickens are looking the same, based on the slaughtering and processing method one is becoming ‘Halal’ and the other one is ‘Haram’. In a similar way, just merely looking at the financial end result of two transactions, we cannot simply endorse saying that Islamic Finance is mimicking the conventional counterpart. Both are having major differences in all the deals and transaction. This is easily understandable if we have the willingness to have a closer look at the transactions and deals. We shouldn’t be carried away based on the end financial impact rather we have look into every aspect of the transactions.

Most of the conventional banks are having the Islamic windows and units for different purposes including keeping up the Muslim customers or getting hold of the Oil & Gold money, do the big deals, get commissions only and many more reasons. Most of the industry stakeholders have been stunned to see the HSBC cut back its Shariah-complaint Amanah arm in all countries except Saudi Arabia and Malaysia two years ago. Meanwhile we have to note that these two countries alone accounted for more than 25% of the total global Islamic banking & finance assets as per the Global Islamic Finance Forum (GIFF -2012) report. Also, it is noteworthy that HSBC has its own challenges as a banking group and also they have been fined USD 1.9 Billion for not preventing money laundering and many other things. So we cannot take HSBC or any other individual bank’s decision as the challenge for the entire industry. Nowadays, there are more than 15 international organizations including two international standard setting organizations working on to bring the universal harmonization and standardization to have the Islamic banking & finance as the global financial system.

There is an emergency call for the Islamic Finance to stop the crimes what the other international monetary organizations and powerful governments are doing for the developing nations. In fact, this action should be taken by every individual. U2 Bono, Irish pop star did an inspiring initiative for many of us to ponder and take immediate actions at our own personal level. He collected 21 million signatures throughout 155 countries against the Third World countries debts and interest payments to be waived off by International Monetary Funds & World Bank during 2002. This signature petition was handed over to the former General Secretary of UN, Kofi Annan to make necessary actions. This was underserved in the Millennium Goals of UN. So it is not only Islamic Finance’s responsibility to stop the financial crimes what’s happening in the world, rather it is everyone’s task to protect the communities & countries from evil financial dealings. The replacement of Islamic economy will eradicate all these nature of slavery, burden and unnecessary influences for the other economies whilst ensuring the equitable wealth for all.

There is a misconception that Islamic finance is catering only to the upper segment of the people and never taking care of the poor. This is merely a whisper and misconceptions by a group of people those who are trying to show a tunnel vision to the other people. Islamic finance is encouraging the people those who are not having the money or wealth to contribute their skills for the economic value addition. There are special programs to take care of the poor. Namely few of those are implemented with the underlying concept of Qard-Al-Hasan (Beautiful Loan), Joint venture model business (Musharaka & Mudharaba), Voluntary charities (Sadaqa), Mandatory Charities (Zakat), and many others. There are specialized Islamic banks to carry out micro finance/credit and Takaful to take care of poor with the pure sense of elevating them to the next level. In certain region, the Islamic banks are carrying out the Islamic Micro Finance activities and in some other regions there are specialized companies/banks to do this task. It is noteworthy, the Islamic Development Bank – KSA is carrying out many Islamic micro finance activities throughout the world regardless of religion. Also, Bahrain’s Family Bank was established as the first Islamic micro-finance bank in the Middle East with the prime objective to contribute to poverty alleviation and socio-economic empowerment of the communities it serves through the provision of sustainable Islamic financial services to the needy.

Sukuk was under the spot light when the global financial crisis has been hitting every country. Many started to structure the Sukuk with and without the full knowledge and exposure of it. According to the Global Sukuk report 2013 of Zawya, there was drop in the Sukuk in 2008 to USD 20 Billion from USD 39 Billion in 2007. This was due to the comment of Dr. Moulana Taqi Usmani regarding the Sukuk stating that more than 80% of the Sukuk was not according Sharia. This has been endorsed and accepted by all the stakeholders during 2007/2008 and inspired Sharia scholars and industry experts to work on the standards. Also, this was an awakening call to AAOIFI to come out with the standards in late 2008 for 14 different types of Sukuk. The same report indicates since 2009, there is a steady growth of Sukuk. In 2012, it has reached up to USD 110 Billion and it is growing with steady annual growth rate.

Islamic banking & finance includes many sectors including the Islamic funds and Takaful (Islamic insurance). Nowadays, every business and individuals require Takaful policies for various reasons including mitigating the business risks. Takaful has been structured under different models including Mudharaba, Wakala, Waqf and hybrid models depends on the country’s regulatory frameworks and the Takaful operator’s risk appetite. There are many differences between conventional insurance and Takaful. As of 2012, Takaful has been accounted only for 1% of the total asset size of USD 1.6 Trillion in 2012 according to Zawya and Bloomberg.

Every baby will be crawling, falling down, walking, running and it will get matured enough to be self-sufficient in its own time and space. In a similar way any business or financial system will have its own life cycle to evolve over period of time and ultimately to become the strongest system. With regards to Islamic finance, the maturity level is varying in different countries. The major Muslim countries have matured enough to implement full and enjoy the benefits of Islamic economy system whilst protecting the fabric of its community and current international trades and contracts. It is noteworthy that in early 2014, the State Bank of Pakistan appointed Moulana Dr. Taqi Usmani as a Sharia Council leader to convert the entire conventional banking system to Islamic banking system whilst in late 2013, Mr. David Cameron, the PM of UK announces the aspiration to become the Islamic Finance hub to the European region. Most importantly, the ruler of Dubai, Shiekh Mohammed declared willingness to support and implement the fully fledged Islamic Economic system in Dubai. Islamic economy not only based on Islamic Banking & Finance rather it is based on food, tourism, media, pharmaceutical and education. These current leaders are showing more and more interest to implement Islamic finance for their economy by knowingly the system will bring the benefit for the entire nation. Otherwise, the former Pope could have not announced during 2009 stating that Islamic Finance has ethical principles which bring the customers closer to the bank in a true spirit of the financial deals and also the 12 year old Canadian girl (Watch the video here: www.youtube.com/watch?v=Ix8bKGQgzqY) will not be calling off the deals with the conventional banks.

Those who believe and love this Islamic Finance industry are raising their concerns regarding the current issues in hand and the direction of the industry with only one aim, which is to make this industry as the global ultimate economic system with sustainability, equity and justice for the world. This should be looked at very positively. Survival and strong surveillance during the global financial crisis in 2009 itself is an endorsement to say that Islamic finance is having the unique features to drive the countries’ economies with utmost richness of social, moral and ethical principles by bringing the balance in wealth distribution to have an efficient tax system. Islamic finance is the ultimate finance system which will exist in the world to run the entire world as it has been instructed by the Creator and guided by the other sources of Islam.

I think it is important to remind ourselves of the topic of the debate which states ‘IS Islamic Finance ready to drive a state’s economy?’  The motion is not about the ideals and utopian model of Islamic finance, but about its practice. The arguments of the ideal model described by defendant of the motion have been there since the inception of Islamic economics and finance—I have identified some of these in my own opening statement also.

However, a state’s economic system cannot be driven by ideal visions but by practical solutions and models that are being practiced.  Statements such as “Islamic finance is entrepreneur and business friendly where it nurtures the talents, new ideas, creative thinking, excellent skills and opportunities in a just, honourable and sustainable manner without exploitation, moral degeneration, social tensions and inequalities” is an example of the utopia that is not being practiced by Islamic finance currently. While not generalising, the bulk of the evidence shows that Islamic finance, unfortunately, is nowhere close to this ideal world. There are many instances that show that Islamic financial sector is profit-oriented and has failed to contribute positively to ethical and social objectives (such as environmental, labour relations, issues). Its ‘Islamic’ nature is confined in narrow terms to legalistic Shari’ah compliance only.

The example of the financial crisis has been given to cite the strengths of Islamic finance and it is true that Islamic finance fared relatively better than its conventional counterpart during the crisis. However, some argue that this was because Islamic financial sector was small and was not exposed to some of the toxic assets that harmed the conventional financial institutions. They argue that had the crisis occurred 10 years after when it happened, Islamic finance would be in the same situation because the industry was busy creating the replications of the same toxic products that caused the crisis. Similar to conventional finance, Islamic finance is increasing the debt levels and has the potential to create bubbles and crisis. In fact counties such as Saudi Arabia and UAE have seen bubbles and crisis in their stock and real estate markets, and Islamic banks also contributed to these just as conventional banks did by providing the financing to fuel the bubbles.   

One of the arguments given for the current status of the industry is that it is young industry and will move towards the ideal model over time. Unfortunately, the trend shows that the model has moved from mudarabah based models to murabahah to tawarruq over time. Currently there are Islamic banks that use tawarruq on both assets and liability sides with products that are replications of interest-based loans. These models are similar to conventional banks, except that Islamic products are more expensive due to sale/purchase of commodities to create the debt.

The whole point of my argument is that by replicating the conventional finance the practice of Islamic finance is moving away from the ideals that the defendant of the motion have put forward. The result of this trend will be that the industry will become an ‘Islamic version’ of the conventional producing the same results and problems. To be able to contribute positively to the economy as envisaged in the ideal model, there is a need to re-orient the direction of the industry from its current practice. This cannot be done by replicating conventional finance, but would require coming up with innovative solutions and models that are based on Islamic principles and values and be used to serve different segments of the society.

Debaters, guests and users’ statements and comments are their independent thoughts, opinions, beliefs, viewpoints and are not necessarily that of MUSLIM Institute's.